NAB flags profit drop on $1 billion in UK write-downs

By James Eyers and Su-Lin Tan

9 October 2014 — 9:25am

National Australia Bank chief executive Andrew Thorburn described $1.34 billion in write-downs as a "disappointing result" for investors but the market sent NAB shares higher on Thursday as a discount for past mismanagement gradually unwinds.

Around $1 billion of the write-downs related to the UK, where a new remediation process agreed with the UK Financial Conduct Authority in August has forced NAB to reassess complaints by clients mis-sold payment protection insurance (PPI).

NAB projects a 14 per cent fall in full-year cash profit in the range of $5.1 billion to $5.2 billion, compared with year-earlier profit of $5.94 billion, and a Bloomberg consensus estimate of $6.18 billion.

Extra impairments were also made on capitalised software and NAB made changes to the treatment of deferred tax assets and R&D taxes. But the market was expecting a larger impairment to be made against the core banking project known as NextGen, and some restructuring in the wealth division, MLC, where no write-downs were made. NAB shares finished the session up 1 per cent to $32.47; the other majors finished around 1.5 per cent higher.

"There was a market view there was going to be sizeable write-downs of various parts of the business, but the number that came out in total was smaller than expected," said Andrew Martin, a portfolio manager at Alphinity Investment Management.

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NAB chief executive Andrew Thorburn.Credit:Josh Robenstone

NAB also took its charges above the line as part of cash earnings rather than as a significant item, which analysts have been pushing for to increase the transparency of reporting.

"Since Andrew [Thorburn] has been in charge, he has done a number of things people have been calling for a while," Mr Martin said. "There has been a discount [on the stock] in the past for management inaction and you are getting a little unwind of that as NAB is seen to be doing the right thing."

Credit Suisse analysts Jarrod Martin and James Ellis told clients that "overall we see this announcement as positive ... Further management action under the new CEO reinforcing the restructuring story."

NAB said its full-year cash profit will now be in the range of $5.1 billion to $5.2 billion, compared with year-earlier profit of $5.94 billion.

"The market has been expecting a number of write-offs and adjustments under the new management team. These are at the larger end of expectations," said UBS analyst Jonathan Mott.

Mr Thorburn said recent discussions with investors revealed the need for NAB's performance to be improved. "That's what I want as well – I do feel the edge of that accountability."

NAB will also cut executive bonuses. "It is clear this result is well down on expectations and as our bonus pool is based on cash earnings and ROE, then we can also expect – and know – that that bonus pool will also be reduced," Mr Thorburn said. "We're working this through with our board and there will be an appropriate and proportionate response."

To alleviate the 33 basis point hit to NAB's common equity tier 1 (CET1) capital ratio as a result of the write-downs, NAB said it would increase its share capital by $1.6 billion by issuing an additional $800 million of shares and adding a discount to its dividend reinvestment plan to lift the participation rate. Analysts are CET1 after the capital raising to be around 9 per cent.

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NAB said it would pay a fully franked, final dividend of 99¢ a share for the year ending September 30, which was slightly down on market expectations.

NAB will report its full-year results on October 30 and Mr Thorburn said he and chief financial officer Craig Drummond would on that day take every question from analysts, about any aspect of the business, until they are exhausted.